Price skimming is a type of price discrimination. It’s considered a way to target people from different income levels and willingness to pay. Not all products are suited for this strategy, so read carefully before testing it out.
What is e-commerce price skimming?
In its simplest terms, it is setting a high price initially when entering a product market, and gradually shaving off the price as the product evolves through its life cycle.
Especially when it’s a technological product, it takes a while before any competitor adopts the technology. So the pioneer company sets a high price and lower it as the competitors catch up with their technology.
Early-adopters, who can’t wait to get their hands on new technology, will buy it from the initial price. They not only cover your innovation costs but they will be your word of mouth marketing channel.
But if you fail to apply this pricing strategy, you run the risk of leaving a lot of money on the table and plummeting market shares.
So keep in mind that it works well with innovative technology products.
Apple’s long-lasting price skimming strategy
Apple’s pricing strategy is the most famous example of price skimming.
Was the iPhone the first smartphone? No. The first smartphone, also the first touchscreen technology phone, was IBM’s Simon Personal Communicator launched in 1992.
iPhone’s distinctive feature was the operating system installed on a cellphone that turns it into a palm-sized computer that can run applications. Its innovative nature attracted many early adopters that purchased 4 and 8 GB models and paid $499 and $599, respectively. Within an hour of its release, many stores reported stockout.
Two months after the first iPhone, the company released iPod and the price of the 8GB iPhone dropped from $599 to $399. The price drop irritated early adopters. Apple offered store credit to them and urged those customers to buy the newest version.
At first, the company maintained the product development at a good pace, therefore maintaining its competitive advantage. Eventually, others caught up with the technology and the company had to lower prices.
For the first time in history, the company released the iPhone 11, for $50 cheaper than the last year’s comparable model.
- Price skimming covers the costs of innovation and provides money for product development.
- Early-adopters naturally become the word of mouth marketing channels.
- It allows you to segment the market and target all at different price levels.
- Early adopters will be disturbed by the price decreases.
- Eventually, every technology is adopted.
The strategy fits perfectly for technologically innovative products since they give a business significant leverage until the technology is adopted/developed by other players.
Once they adopt your technology, it’s critical to lower your prices before you alienate customers.
Frequently Asked Questions
Apple’s pricing strategy is the most famous price skimming example. iPhone was an innovative technology product with no direct competition whatsoever, therefore the company successfully implemented a price skimming strategy. Today, however, other players caught up with the technology, and Apple has to offer more competitive prices.
To cover the costs of innovation and target multiple market segments at different price levels, usually when entering a new product market.
The businesses that produce innovative technology products pursue this strategy. For example, the first drone producer might have skimmed the market off before others adopted the technology.